It is already clear that next year will be a defining one for IFAs and the industry as a whole, writes John Porteous, managing director – central financial services at Charles Stanley.
There are going to be three major action points businesses will need to address.
Consumer Duty
It’s impossible to look ahead to 2023 without recognising the huge impact of the FCA’s Consumer Duty, which lands in July. This marquee regulation will permeate all aspects of the financial services industry: advisers, investment groups, product providers and platforms.
Any lingering thoughts that “this won’t affect us” should be cast aside. It will mean different things to different businesses, but IFAs of all shapes and sizes are going to need to view their activities through a Consumer Duty prism, making sure there is a clear plan of action around communicating with different cohorts of clients.
Above all, it means a relentless focus on positive client outcomes. This is clearly something we all always want when dealing with customers, but the Consumer Duty goes much further than previous legislation and requires a complete shift in mindset.
For all IFAs, it will mean being very clear in terms of defining target markets, and for some it will mean adapting or refining more process-based approaches. In particular, firms can no longer rely on a reactive, ‘tick box’ attitude to regulation. Instead, businesses must be proactive, thoroughly testing and evidencing whether products and services meet the needs of their customers, taking into account the entire value chain before ultimately ensuring that consumers are getting fair value for money.
I have no doubt the majority of IFAs will rise to the challenge. In my experience, they already review their procedures frequently and ensure they put the interests of the client at the forefront of everything they do. However, the new rules mean a greater focus on demonstrating the processes of collecting relevant customer feedback, testing and carrying out improvements in the four areas of focus: products and services, price and value, consumer understanding and consumer support.
A positive aspect of the Consumer Duty is its clarity. It is a remarkably detailed and specific paper. While not prescriptive in terms of what businesses need to do, the FCA is abundantly clear about the principles that need to be embraced. What that means for your business is going to be different to others, so I urge all concerned to commit two or three hours to thorough assimilation of the paper in full rather than relying on media snippets.
The noise surrounding the duty can actually make it harder to concentrate on what really matters to you and your business. Some elements highlight and develop areas practitioners will already be well versed with, but some will be completely new, so it is best to take the time to digest the entire document with your business model in mind. Nobody knows your business better than you.
While response to Consumer Duty is going to vary according to business size and type, the concept of taking ‘all reasonable steps’ to the cross-cutting rules – act in good faith, avoid foreseeable harm and enable and support retail customers to pursue their financial objectives – sets a high ‘duty of care’ bar to be met by all IFAs.
Remember, an assessment report focusing on how the firm is producing good consumer outcomes is to be presented to a firm’s board or governing body on an annual basis, so a well-considered plan to understanding your target market and embedding the consumer duty, laying the foundations of this report, is essential.
Hybrid advice propositions
‘Hybrid advice’ is too disparate a term for today’s financial services landscape and covers too broad a range of propositions.
Currently, ’hybrid’ straddles multiple areas: full advice propositions provided online, supplementary services to direct propositions and the previously ubiquitous ‘robo’ services offering risk targeted portfolios. The space is now broadening and maturing, so the catch all definition needs to be subcategorised, especially in light of the FCA’s proposed expansion of the parameters of simplified advice for consumers with straightforward financial needs.
This lays the ground for IFA businesses to develop their own solutions that help address the cohorts of customers where the full financial advice process is cumbersome and doesn’t necessarily stack up in terms of fair value for clients or time spent by the adviser.
To my mind, Consumer Duty requires evidential engagement and strong service levels across the board, so the opportunity to engage more efficiently with any ‘tail’ of clients while satisfying regulatory needs should be a key area of development in 2023.
Smaller IFAs may find the prospect of increased digitalisation worrying, but all advisers can adapt and harness technology, and it needn’t be that expensive. However, some in-depth reflection on business requirements is necessary to clearly identify gaps in proposition and define the problems you are trying to solve. Where are you not as efficient as you can be? Where do you see competitors in the same space succeeding and achieving?
With some IFAs finding themselves the wrong side of the technological divide, this may represent an opportunity to encourage younger individuals into the industry. More targeted qualifications for simplified advice propositions could represent a lower barrier to entry for newcomers who bring complementary skills to your business in terms of technological know-how.
The greater propensity of younger generations to engage digitally is, by the way, an important reason to segment your target market using factors other than wealth. The needs and preferences of clients who happen to have a similar level of investment can be very different.
Articulate the value of your advice
As already noted, the FCA Consumer Duty rules represent a watershed moment in terms of the assessment of value for money across the entire industry. This may be keenly felt amongst IFA’s. The value for money debate has been highly active amongst other areas of the industry for some time, and costs have been driven down substantially among platform and asset managers through past FCA led reviews and market competition.
Consumer Duty is a catalyst because the regulatory requirements are refocused around a cost, proposition and consumer outcome framework. The message from the FCA is that the price customers pay for products and services should be proportionate to the value, and I think this is an issue that will start hitting the headlines in 2023. IFAs will need to detail how fair value is provided to clients for the fees they pay, and it may be necessary to construct different charging structures for different types of clients or services provided.
This should not be seen as a race to the bottom but a challenge to clearly document fairness and value-add. The timing is, nonetheless, unfortunate as it comes at a time when several profound challenges to customers’ wealth and sentiment have coincided.
High inflation and interest rates, the threat of a prolonged recession, worrying geopolitics and civil unrest provide an unnerving backdrop. Add to this the poor performance of markets over the past year, with no obvious safe haven to be found, and the greater sense of anxiety is palpable. This leads, potentially, to greater cost-consciousness.
Experienced advisers will have seen plenty of difficult cycles before, but it may be a fresh challenge to develop a detailed framework for value during a downturn. When doing so it is important to look ahead and consider how the client base is changing. The next generation, the beneficiaries of the intergenerational transfer of wealth, tend to look at things differently.
Besides embracing technological solutions and different types and styles of communication, it means integrating key issues such as sustainability or diversity and inclusion is going to be increasingly important.
This article was written for International Adviser by John Porteous, managing director – central financial services at Charles Stanley.
